Is the ATO dusting off 100A as its new weapon of choice?

What is Section 100A?

The best way to describe 100A is by use of an example.

For the year ended 30 June 2021, the Green Family Trust has $100,000 of trust (and taxable) income to distribute.

Mr Green works full time and has other taxable income of $200,000. However, Mr Green’s Father (‘Bob’) is retired and Mr Green’s daughter (‘Bianca’) is at University and neither of them have any other taxable income.

The trustee distributes the $100,000 of taxable income equally to Bob and Bianca. The cash funds never find their way to Bob and Bianca’s bank account, or if they did the funds were rerouted back in Mr Green’s bank account (net of the tax liability).

Is this an issue?

When you break it down, the two beneficiaries were distributed income by the trustee because they were on a lower tax rate as opposed to Mr Green who is on the highest tax rate of 47%. Further the funds have then found their way back to Mr Green. This in a nutshell is what 100A (Reimbursement Agreement) is trying to attack.

A reimbursement agreement generally involves making someone presently entitled to trust income in circumstances where both:

  • someone other than the presently entitled beneficiary actually benefits from that income, and
  • at least one party enters into the agreement for purposes that include getting a tax benefit.

This happened 5 years ago, so the period of amendment will stop the Commissioner going back, right?

No, 100A is an anti-avoidance provision, therefore there is no period of amendment and the issue will always be a live issue.

Section 100A opens up a large can of worms. The trustee could potentially be liable at top marginal tax rates should 100A apply.

Are there any exclusions?

Section 100A doesn’t apply where:

  • an agreement has been entered into in the course of an ordinary family or commercial dealing; or
  • the presently entitled beneficiary is under a legal disability (for example, a minor).

Section 100A may also not apply where the presently entitled beneficiary is the trustee of another trust.

Whether a particular agreement constitutes an ‘ordinary family or commercial dealing’ (which isn’t defined), and is therefore not a reimbursement agreement for the purposes of section 100A, will depend on all of the relevant facts. However, in the fact sheet provided by the ATO, their interpretation of an ‘ordinary family dealing’ is extremely narrow, and based on the example above, would not apply.

The ATO need to resolve what an ‘ordinary family dealing’ is. If it falls within this meaning then it is excluded from 100A. Are trust distributions to adult kids who are at University or the like in the example above an ‘ordinary family dealing’? Many would think so, and I am sure there are many trustees that have made these type of distributions in the past.

If the cash isn’t distributed to the beneficiaries, rather it is retained by the trustee and on-lent to ‘Dad’ in the above example, will 100A apply?

There appears to be a bit of a concession in these circumstances. The ATO have stated:

Bona fide loans are a feature of many ordinary commercial and family dealings.

Where a trustee lends money on terms that require repayments of principal and interest, this would generally indicate an ordinary commercial dealing.

However, a loan made in the course of ordinary family dealings may qualify for the exclusion even if it is not made on commercial terms. For example, where money is lent by a trustee to a family member on terms that require repayments of principal only (and such repayments are intended to be made) this could still indicate an ordinary family dealing when considered together with all the other relevant facts.

So where to from here?

The ATO website has indicated that there is advice under development with respect to 100A and the purpose and ordinary dealing exclusion.

This draft Ruling will set out the Commissioner’s preliminary views on the exclusions from a ‘reimbursement agreement’ for:

  • agreements not entered into with a purpose of eliminating or reducing someone’s income tax, and
  • agreements entered into in the course of ordinary family or commercial dealings.

The expected completion time is October 2021.

The above article was contributed by Sean Urquhart – Tax Director at Nexia – Sydney Office. If you require specific taxation advice feel free to contact him direct on 02 8264-0755.

Please refer to our disclaimer. The above is general information only and should not be relied upon as taxation advice.

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